Sustainability: Ending the ‘Tyranny of Short-Termism’
Consider these three developments from back in 2008, as the global economy hurtled toward a financial meltdown:
- National Grid set an industry-leading long-term target to reduce its greenhouse gas (GHG) emissions 80 percent by 2050, in keeping with current climate science.
- Timberland launched a long-term corporate social responsibility (CSR) strategy that includes quarterly stakeholder calls with CEO Jeff Swartz and a first-of-its-kind online stakeholder engagement platform.
- Ford chartered its Board Sustainability Committee to foster “sustainable growth” with “long-term value,” a step that now has the company moving aggressively to produce the most fuel-efficient cars and trucks in the industry.
What do they have in common? All three focus on the long-term, spurning what McKinsey’s Dominic Barton, in a recent Harvard Business Review article, calls “quarterly capitalism” (which has proven so destructive) in favor of what he calls “Capitalism for the Long Term.” Barton’s article outlines three key tenets for rewiring the 21st century corporation and its role in society, all of which are displayed in the examples above:
- Fight the Tyranny of Short-Termism
- Serve Stakeholders, Enrich Shareholders
- Act Like You Own the Place
Barton refers in passing to “sustainable growth” and environmental, social and governance (ESG) factors in his excellent piece, but he fails to highlight the inseparable connection between capitalism and long-term global sustainability.
So let’s examine that connection here. In addition to the economic crisis, businesses operating in our global economy face colossal environmental and social challenges – climate change, energy and water constraints, population pressures, rising consumer expectations and endemic poverty, to name just a few. Addressing those problems with urgency and scalable solutions will be a key driver of future prosperity for global companies and their wider community of investors and other stakeholders.
The business case for acting on sustainability is compelling. A recent MIT Sloan/Boston Consulting Group (BCG) study divides surveyed companies into “embracers,” those actively integrating sustainability into their core business strategies, and “cautious adopters” who see sustainability as “essential to remaining competitive” but lag on core integration.
“The embracers, it turns out, are the highest performing businesses in the study,” say MIT and BCG — not only on tangibles such as profitability, but also intangibles such as employee engagement, innovation and stakeholder appeal. Among the embracers getting shout-outs: Unilever, Duke Energy, Proctor & Gamble and Clorox.
Mercer reaches a similar conclusion on perhaps the biggest sustainability challenge of all – climate change. In its February report, Climate Change Scenarios – Implications for Strategic Asset Allocation, Mercer finds that climate change poses 10 percent downside investment risk in portfolios, but also brings immense investment opportunities from low carbon technologies —a potential $5 trillion global market by 2030.
In other words, sustainability will be a central nexus for corporate innovation and growth as the sustainable global economy takes hold. Companies that resist by clinging onto short-term strategies – the U.S. automakers’ previous misguided reliance on gas-guzzling vehicles, comes to mind – do so at their peril.
How do companies avoid the trap of short-termism in favor of sustainable approaches that achieve long-term value creation? The Ceres Roadmap for Sustainability charts a course, offering four parallel paths (governance, stakeholder engagement, disclosure and performance) for 21st century corporations that can be overlaid on Barton’s blueprint.
For example, the Roadmap and Barton’s “Capitalism for the Long Term” both call for linking executive compensation “to the fundamental drivers of long-term value, such as innovation and efficiency, not just share price” (Barton) and “sustainability performance” (Ceres). Today, National Grid links compensation to meeting its GHG emission reduction targets (with an interim target of 45 percent by 2020). This year for the first time investors filed resolutions asking companies such as ExxonMobil, Massey Energy and Lowe’s to link compensation to sustainability metrics, rewarding sustainability innovation and punishing failure to manage sustainability risks.
The Ceres Roadmap and Barton’s “Capitalism for the Long Term” both call for forward-thinking research and development – “investing for the next quarter century, not the next quarter,” (Barton), and “using sustainability as a filter for all R&D” (Ceres). Companies such as General Electric, Proctor & Gamble and DuPont have set aggressive R&D targets for making existing and new products more sustainable. In GE’s case, that means products like thin-film solar, energy storage and low-cost water treatment.
For all of these companies, emerging economies are the golden bonanza for these offerings. Esteemed management expert C.K. Prahalad calls it, “the fortune at the bottom of the pyramid.” These are countries where billions of people, in moving from subsistence to active participation in market economies, are clamoring for clean water, affordable energy, nutrition and mobility.
Lastly, the Ceres roadmap and Barton both call for far-sighted investment practices that treat “capitalism as a whole” (Barton), and “reward companies that fully integrate sustainability” (Ceres). Investors such as Deutsche Asset Management, CalPERS and Nikko Asset Management are moving more aggressively to integrate sustainability in investment decision-making across all of their asset classes. Nikko Asset Management is especially interested in greening its fixed-income assets, and last month it reported stellar 11 percent returns over the past 12 months on its new Green Bond Fund.
These are encouraging examples, and no doubt more companies and investors are grasping the urgency – and vast opportunity - of moving their own enterprises more aggressively on sustainability.
But many more examples are needed – and quickly. Of course, no individual investor or company can fix the world’s ills on its own. That leads to my final ‘to-do” – engagement, which means ending the ‘busy-minding-the-store’ mentality (Barton) with “robust dialogue with stakeholders across the entire value chain” (Ceres).
In simple terms, investors, companies, labor, employees, policymakers and others must all come together now to find smart, big solutions to the world’s mega sustainability challenges. Acting incrementally, acting in isolation, will not do the job of building a sustainable 21st century global economy.
Mindy Lubber is president of Ceres, a leading coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as climate change and water scarcity. Lubber also directs the Investor Network on Climate Risk, a network of 95 investors with collective assets totaling $9.5 trillion.